Blending principles of diversity and inclusion is a key emerging theme of the environmental, social, and governance (ESG) focus among investors, shaping their actions to maximize returns. There is an opportunity in Asia, in the alignment of capital with ESG considerations, for sustainable returns when it comes to banking.
The Diversity Premium
Research shows that there is a strong correlation between companies with greater gender diversity and generating higher returns on capital. Those that have representation of women in management of above 20 percent excel when compared to those with less than 15 percent. Greater gender balance can generate up to 200 basis points of alpha. Additionally, this research found these companies to display superior ESG scores more broadly.
The data shows that more diverse companies achieve better EBITDA margins and higher cash flow returns, while having lower leverage over time. This correlation between more gender-diverse companies and superior corporate and share price outperformance is what is called the diversity premium.
When this is supported by a diverse board, ensuring the company considers a variety of perspectives in their decision-making processes, we see inclusion in practice. Such boards are more likely to put women in senior positions to drive better corporate performance and sustainable growth. Multiple stakeholders—from regulators, companies, and investors—are converging rightfully on the view that diversity leads to more efficient market access and the realization of untapped potential.
There is an opportunity in Asia, in the alignment of capital with ESG considerations, for sustainable returns when it comes to banking.
The Gender Entrepreneurial Gap and Opportunity
In Asia, female representation in entrepreneurship has improved over the past five years, with a rise in the ratio of female-to-male-founded startups. Research shows that female-founded businesses are smaller, with lower revenue and lower valuation. Women may face higher barriers to accessing capital and venture capital funding, which are currently mostly directed at male entrepreneurs.
Coupled together, this presents an opportunity for investors and banks alike to lead the change by channeling more capital towards female entrepreneurs in private markets as they embark on the path toward listing. In recent years, more funds are being channeled to female-owned businesses through gender-lens investing. While assets under management devoted to gender-lens investing have increased to $10 billion as of Q1 2021, more can be done to further improve the representation of women in entrepreneurship.
Importantly, it will take a concerted effort from all parties to strike a balance for female entrepreneurs. This includes a top-down commitment from companies to improving diversity and a bottom-up environment of ground support through networks and collaboration. Women represent half of the world’s population and are an increasing portion of financial market participants.
The Essence of Banking in Asia
Banking creates connections between providers of capital and the management/entrepreneurs that put it to productive use. Connectivity is one of the core functions of our industry, a basic innovation to create prosperity as Asian entrepreneurs, corporates, and investors seek to participate in local and global markets.
At its best, this industry facilitates growth, job creation, and liquidity, and supports lifestyles across a myriad of different economic situations. Financial institutions and investment firms have an enormous opportunity to influence social and economic development in Asia. Together, we can steer the region towards a more diverse and sustainable future.
This is especially relevant in emerging Asia, where access to capital has had a transformational impact on economic development. Take Vietnam, which has become an economic success story. Since it launched its first stock exchange in 2000, GDP per capita has increased faster than any other ASEAN nation. International investors have helped provide Vietnam’s leading companies with the capital they need to thrive domestically and pursue a path to compete globally.
Innovation is at the heart of the growth and success of Asian economies driven by the ingenuity of its entrepreneurs. The technology sector has flourished in these markets by providing real-life solutions to everyday problems. The transformative power of capital is evident in how FinTechs have provided banking and payment systems to the largest, youngest, and fastest growing populations of Indonesia, the Philippines, and Vietnam—expanding investment and economic development opportunities.
When it comes to ESG, there is a real opportunity for the role of banking to drive a change in mindset in Asia. For many corporates, there is an understandable emphasis on E (Environment) in ESG investing, but we have long been convinced that S (Social) has the advantage of providing different performance drivers as well.
Banking activity that brings together complementary benefits across the spectrum of ESG to identify the diversity premium or gender entrepreneurial gap may bring meaningful uplift in delivering financial and societal returns needed to secure a more sustainable future.